Financial institutions such as Wells Fargo, Bank of America and J.P. Morgan Chase were founded generations ago. Alternatively, how many hedge funds can be named that have outlived their founders?
Of course, the reason is obvious; hedge funds are a product of their founders and the founders are typically responsible for a fund’s strategy as well as its fundraising. Hedge funds are, in fact, a cult of personality. Consequently, when the founder moves on, the hedge fund has effectively lost its beating heart…and what follows is the inevitable.
Does It Have to Be This Way?
The short answer is, no. The fact that hedge funds, as a rule, have not focused on creating going concern value is more indicative of a lack of interest on the part of the founder, not the difficulty of doing so. Founders, after all, tend to have an “it’s all about me” persona. Consequently, not much thought is given to what happens to the hedge fund when they are gone.
However, a subtle shift in mindset has the potential to nurture a sustainable business model for the hedge fund industry.
A Hedge Fund Built to Endure
There are lessons to be learned from philanthropic endeavors. The goal of the philanthropist is to ensure a legacy in which his values and insights are perpetuated. Ironically, hedge fund founders are often prolific donors, but just as their hedge funds, the philanthropy typically ends when they do.
While a philanthropic institution may diverge from its mission and spend money in ways never intended, such is not the case for a hedge fund. Its mission will always be to shield its investors from risk and achieve respectable gains for the individuals, institutions and government entities that have entrusted it with their money.
The manner in which one chooses to reflect his values is a conscious choice. If through philanthropy, it is prudent to do so while you’re alive. However, if one wants his values reflected in his business, then choose to make it a going concern.
Achieving this will require continual reinvention in a world that is marked by continuous change, and what better institution than a hedge fund, whose hallmark is innovation, to reach this goal. Importantly, this means making hedge funds less dependent upon personality and individual brilliance and more on innovation and client centric practices.
Why Choose to Create a Going Concern?
Such a shift is almost certain to bring increased stability to the industry by reducing the ebb and flow of hedge fund firms opening and shuttering, which is currently occurring at an unprecedented rate. This added element of stability creates the potential to attract talent that may have otherwise looked elsewhere for employment opportunities. After all, as the media delights in pointing out, over 10 percent of hedge funds close each year.
Hedge funds that endure need to focus on what their clients want and demonstrate a willingness to innovate in ways that ensure they receive it. Otherwise, hedge fund firms with exceptional talent and substantial assets will invariably forego the legacy to which they are entitled.